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IP Asset Accounting

Intangible asset accounting is coming to the forefront of the corporate agenda in most of the countries including India. The Ministry of Corporate Affairs, in collaboration with The Institute of Chartered Accountants of India has been able to incorporate very specific and focused disclosure for intangible assets in the Revised Schedule VI of the Companies Act 1956 which is effective for all the balance sheets being prepared as on 31.03.2012. It will also become essential to mention the previous year's comparative figures as on 31.03.2011 in correspondence with the disclosure requirements for Intangible Assets and Intangible Assets under development under the head Fixed Assets (non-current assets), in terms of compliance of Accounting Standard 26 (AS-26) as issued by The Institute of Chartered Accountants of India.

The new disclosure requirement as per Schedule VI is as below:

Assets:

Non-Current Assets

a) Fixed Assets

i. Tangible Assets
ii. Intangible Assets
iii. Capital Work in progress
iv. Intangible Assets under Development

Intangible Assets:

Classification shall be given as:

a) Goodwill
b) Brands/Trademarks
c) Computer Software
d) Mastheads and publishing titles
e) Mining rights
f) Copyrights, and patents and other intellectual property rights, services and operating rights
g) Recipes, formulae, models, designs and prototypes.
h) Licenses and franchise
i) Others (specify nature)

It is possible that for the financial year ending 31.03.2011, the companies might have accounted for intangible assets of the aforesaid categories under different heads and therefore would be required to rectify and reclassify the same in their balance sheet as on 31.03.2012 in order to comply with the requirements of Revised Schedule VI. Similarly, if there has been some acquisition or development of any intangible assets (Intellectual Properties) it will have to account for the same strictly as per the AS-26 and make suitable disclosure in the balance sheet as on 31.03.2012. It is obvious that non-compliance will result into qualification by the auditors of the company as it will affect the true and fair view of the state of the affairs of the company as per the requirements of Section 211 of the Companies Act 1956.

International Financial Reporting Standard (IFRS) is under implementation program by all Indian Companies in a phased manner. The Indian AS or the Indian Accounting Standards, the new version of the applicability of IFRS are not yet proclaimed by Government of India. Indian AS-38 is the current Indian Accounting Standard for Intangible Assets hosted by MCA on its website but the enforceable date is yet to be notified by the Govt. of India.

The AS-26 is similar to IFRS on accounting for internally generated intangible assets whereby Research expenses are charged to revenue but the development costs are capitalised and amortised on fulfillment of certain criteria. However, if any intangible assets are acquired on payment of consideration, these are capitalized and generally amortised over useful life not exceeding ten years. No revaluation is allowed under AS-26 as against IFRS which recognizes revaluation in exceptional cases if any intangible assets have useful life of more than 10 years, impairment testing is done on compulsory basis. IFRS provides for amortisation but for intangible assets with definite useful life only but impairment testing is done on annual basis.

ITAG has identified intangible assets accounting as an important area where training and consultancy can be provided to the Corporates who need to comply with accounting standards as per Schedule VI and IFRS requirements.